Last week we wrote "Cheap Leveraged Upside on Potential Major Oil Discovery", a bullish call on Reconnaissance Energy Africa Ltd. (RECO.V) (RECAF) and in particular its warrants under the symbol of RECO.WT.A. It was based upon the announcement of results on RECO's Kavango West 1X well in Namibia. According to the press release: "Extensive wireline logging indicates ~85 metres (~280 feet) of net reservoir with 64 metres (210 feet) of net hydrocarbon pay across a gross interval of ~400 metres (~1,300 feet) containing multiple limestone reservoir units."
Our thesis worked out perfectly as the stock moved up to $0.94 this past week and the warrants more than doubled to hit as high as $0.47 before pulling back to close the week at $0.38. Even though the warrants hit our initial target, we are still bullish as we think they offer a uniquely massive upside for two reasons. First, RECO looks like it will go on a continued run on excitement over its new discovery as it heads into the next phase of production testing in Q1. Second, RECO.WT.A is massively underpriced relative to its other set of warrants, which we think are correctly priced given the upside in the stock.
Brian Reinsborough, CEO and President of ReconAfrica spoke with with Justin Cochrane, Head of Upstream African Research at S&P Global Energy on the positive results and next steps heading into 2026:
This mainstream investor coverage of RECO's developing opportunity will only further add excitement towards the stock and warrants. Looking at RECO's other warrants only proves that point. In addition to RECO.WT.A, which can be exercised for one share at $0.60 until June 17, 2027, it has two other sets of warrants trading under the symbols RECO.WT and RECO.WT.B. RECO.WT expires at the end of July 2026 at a $1.75 strike price. RECO.WT.B expires on September 29, 2027 with a strike price of $0.72. When looking at a chart of the terms of the warrants and closing prices, you can see that the pricing is totally out of whack with RECO.WT.A being an undeniable bargain:
RECO closed the week at $0.94. With a strike price of $0.60 and a price of $0.38, RECO.WT.A trades with just a $0.04 time premium. This leads to an impossibly small implied volatility of 5%. Anyone with any experience with options and warrants, particularly on small cap stocks, knows that RECO.WT.A is trading at a bargain. Even without being bullish on RECO itself, one could set up some financial engineering to take advantage of the low IV on RECO.WT.A and incur some arbitrage profits. But we aren't here for that. We are here for upside potential.
Because of the high strike price, RECO.WT has a time premium of $1.09. At Friday's close of $0.28, this leads to an implied volatility of 156%. We think that this is fair value. These warrants should be trading at this implied volatility because RECO's high, near term upside can lead it to trade well above the $1.75 strike price within the next six months. It's simply a case of RECO.WT.A and to a lesser extent RECO.WT.B being undervalued. RECO.WT.B trades at a 68% implied volatility. This is a deal, but because RECO.WT.A trades at a lower price despite having a strike price that is $0.12 lower, investors and traders should focus all of their capital on RECO.WT.A. The three months in extra time to expiry in 2027 does not offset the value of the lower strike price. That might be of importance in the spring of 2027, but right now both warrants have enough time to expiry.
Another way to look at RECO.WT.A being a bargain is to use the same implied volatility of the other sets of warrants and compare the price:
At a 68% implied volatility, RECO.WT.A would be priced at $0.48. At a 156% implied volatility, RECO.WT.A would be worth $0.70. The fair value of RECO.WT.A is likely somewhere in between. At a 90% implied volatility, the warrants would be worth $0.54. Keep in mind that this is the price the warrants should be trading today just purely on speculative upside and leveraging opportunity of RECO. If the stock has a week like it did last week and trades well above $1.00, these warrants will be worth even more. So will the rest of the warrants, but RECO.WT.A is unambiguously the best of the three. Because the warrants have only $0.04 of time premium, they have to go up with the stock at least penny for penny going forward. If the stock doubles to $1.88, RECO.WT.A will be worth at least $1.28, more than 4x upside from here. The other warrants don't offer quite that good of an upside.
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Disclosure: We are long RECO.WT.A
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